Share Volume to Stay Low as Euro Crisis Hits Industry

Trading in European equities is at its lightest since the euro zone debt crisis began and is set to stay low as shaky economies and stricter regulation shrink business for the financial industry.

LONDON -- Turnover in European equities
trading is at its lightest since the euro zone debt crisis began
and is set to stay low as shaky economies and stricter
regulation shrink business for the financial industry.

Those two major drags mean the equity trading industry is
unlikely to benefit much in 2013, even though leading investment
banks are increasingly advising clients to buy the region's
cheap shares after policymaker efforts to fix the debt crisis.

Shares worth 14.8 trillion euros changed hands in Europe in
the first 11 months of 2012, down 17.3 percent year-on-year and
the lowest total since 2009, according to Thomson Reuters Equity
Market Share Reporter data.

The low turnover reflects a lack of investor confidence
after three years of the debt crisis, reducing the funds
available to put into equities as Europe's economy and the
financial industry contract.

"If you are confronted on a daily basis with uncertainty
with regards to policy you simply do not jump into the water,"
Patrick Moonen, a strategist at ING Investment Management in
Amsterdam, said. He added inv e stors would wait for better
economic data before moving back wholeheartedly into equities.

Crisis-fighting plans from central banks have recently
driven down bond yields, fuelling an 18 percent low-volume rally
in European stocks since June and leading European fund managers
to increase the share of their portfolios invested in equities
to a 20-month high in November.

But with European economies likely to stay weak and new
rules making equity investment less attractive, volumes were
expected to grow by a meagre 3 percent in 2013, according to
Europe's largest exchange, BATS Chi-X.

"Any pickup in equity volumes from asset reallocation will
be offset by a decline in volumes for other reasons, such as
regulation, transaction taxes and general austerity," a
London-based trader said.

TOUGHER RULES

Alongside economic weakness, equity volumes were likely to
be constrained over the longer term by tighter capital
requirements imposed on financial companies in an effort to make
them better able to withstand financial turmoil.

European insurers, which have investments of 7.7 trillion
euros, according to industry body Insurance Europe, will have to
put up more capital against holdings of risky assets.

The new Solvency II rules, which are due to take effect in
2014 but may be delayed, mean insurers will need to hold capital
equivalent to nearly 40 percent of the value of a stock
position, compared with around 10 percent for a triple-A rated,
five-year government bond, according to BNP Paribas Investment
Partners estimates.

AXA Investment Management estimates the prospect of the
reform has driven a 500 billion euro shift out of equities and
into debt since 2009, reducing total return on European shares
by up to a quarter.

"Even if Solvency II is delayed, the discipline will remain
in place at insurance companies. They've moved from a culture of
performance to a culture of risk control," said Anita
Barczewski, head of AXA IM's Framlington unit.

Similarly, banks have been asked to triple the basic capital
they hold to comply with the Basel III reform, a global response
to the financial crisis due to be phased in from next year.

This is leading many to scale back capital-intensive trading
businesses, including proprietary, or "prop", desks that invest
the banks' own money -- contributing to the drop in volume.

VICIOUS CIRCLE

By taking capital out of equities, these large, long-term
buyers reduce market liquidity, denting businesses that depend
on volumes, such as execution trading houses, which buy or sell
according to orders from portfolio managers.

Investment banks are feeling the pain. Revenues from
equities for the top 10 banks was $26 billion in the first nine
months of 2012, down 10 percent on a year before, according to
analytics group Coalition. Cash equities revenues were down
about a quarter.

The impact of the fall in volume was clear last month, when
Citigroup laid off 50 staff from its cash equity unit as
part of broader redundancies in investment banking, sources told
Reuters.

Major banks have cut 160,000 jobs since early 2011, with
redundancies in Europe outnumbering Asia or the United States,
according to Reuters analysis.

"At a prop level, people are less prepared to risk their
reputation because in this environment it takes very little for
your bosses to say 'you screwed up, you're out'," a
pan-European, Milan-based broker said.

"After the (2007-09 financial) disaster people thought we'd
come back quickly but that hasn't been the case. Now people are
starting to think we'll never go back to a pre-crisis world or
that it would take a lot of time."

The value of the average trade on the Euro STOXX 50
index dropped to around 24,000 euros in October from
around 36,000 euros in early 2008, according to Credit Suisse.

Traders said plans for a transaction tax in 11 euro zone
countries, intended to make the financial sector contribute to
the cost of the debt crisis, were already curbing plans to
expand trading activity.

One London trader said the new rules were suppressing
volumes and making investment less worthwhile.

"One day (regulators) might realise this but it's a long way
off, and by that time the industry will probably look
substantially different to how it is now."